European Union Governments Agreed—for the first time in this crisis—that their governments would send the IMF up to €200 billion ($267 billion) ...

Friday, December 9, 2011

European Union governments agreed—for the first time in this crisis—that their governments would send the IMF up to €200 billion

European leaders continue to look longingly to the International Monetary Fund to help resolve their crisis, not only for money but as an enforcer of tough conditions to be imposed on indebted euro-zone governments.

At their summit in Brussels Friday, the heads of European Union governments agreed—for the first time in this crisis—that their governments would send the IMF up to €200 billion ($267 billion) to bolster the fund's resources, likely from national central banks in Europe.

The officials hope the contributions will draw money from others, including emerging markets such as China and Brazil, that have offered to help fight the euro-zone crisis—but only through the IMF.

The move, while seen by many nations outside Europe as a supportive gesture, isn't a significant step toward addressing the core market fears about Europe.

One of those fears is that a major euro-zone economy could have trouble borrowing, but be too big for an IMF rescue program. A much larger bailout fund will be required to allay that worry, but the agreement Friday could reassure investors that the IMF can play a supporting role.

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"These resources will enhance the IMF's capacity to fulfill its systemic responsibilities in support of its global membership--which is especially important given the ongoing economic slowdown and financial market tensions," IMF Managing Director Christine Lagarde said Friday.

The European governments plan to draw up details in the next 10 days for the funding, which would be separate from their €440 billion taxpayer-backed bailout fund, the European Financial Stability Facility. About three-fourths of the new money going to the IMF would come from the 17 nations that share the euro currency, with the rest from the other 10 European Union nations.

The leaders have indicated the money would come from national central banks in Europe, not the European Central Bank. In an important breakthrough, Germany's Bundesbank—one of the central banks most resistant to bailing out its European neighbors—signed on to the plan.

But it isn't without controversy. ECB President Mario Draghi on Thursday threw cold water on the idea, saying it is illegal for the ECB or national central banks to lend money to the IMF for the purpose of buying government bonds, an indication that the IMF would have to find some other use for the money. A number of European officials have suggested that the ECB should lend vast sums of money to the IMF, which could in turn lend to national governments, to circumvent a treaty that prohibits the ECB from financing government deficits.

The IMF, which serves as an emergency lender for its 187 member nations, faces its own constraints and internal disputes. Many IMF members—including the biggest, the U.S.—are reluctant to put more of the fund's money at risk in the troubled euro zone until Europeans put more of their taxpayers' money on the line.

One IMF-directed approach that could prove more forceful to stem the crisis would be if European nations provided capital—funds that would likely need to be approved by political authorities—into a special administered account at the IMF.

European officials discussed such an approach in recent months, perhaps using money from the euro-zone bailout fund, the EFSF. That money, in an account administered by the IMF, would be able to take losses without risk to the other IMF members.

The benefit to European nations: The IMF would act as an independent enforcer and insist that borrowers agree to overhaul their budgets and meet specified targets as a condition of receiving funds.

While that would be seen as a huge step forward, those discussions haven't progressed because of the continuing reluctance of European nations to put more of their taxpayers' money at risk.

Still, the IMF is certain to be involved in any ultimate solution, at least to enforce the terms of any European bailouts. It is already doing that in the rescues of Greece, Ireland and Portugal. The IMF has committed more than $100 billion to those countries.

IMF officials are also key players in trying to craft a solution to the crisis, so more countries won't need bailouts, as the global economy hangs in the balance. Like U.S. officials, IMF leaders have engaged in a kind of shuttle diplomacy in recent months in trying to mediate differences between euro-zone nations.

Ms. Lagarde, who took the IMF helm last summer, and her deputy, former White House official David Lipton, often participate in key decisions at the euro-zone gatherings and summits of the Group of 20 leading economies.

The IMF uses money contributed by its member nations to fund aid programs. It conducts regular economic reviews of all its members and has an army of economists and finance experts available to monitor member nations and pursue potential solutions.

Governments tend to prefer sending their money through the IMF because of the fund's track record and credibility. It has never lost money on a loan to a struggling nation, in part because it is generally the first in line to be paid back. And because its member nations are on the hook for most IMF programs, the fund's loans tends to be stricter and more effective than deals between individual nations.

The IMF "has a huge benefit in a crisis situation because it enjoys great trust and confidence," European Central Bank governing council member Erkki Liikanen told Finnish public broadcaster MTV3. "It also has experience with conditional financing, and all such temporary financing should be conditional."

European officials have invoked the IMF in each of the three G-20 gatherings since the summer. Often, that reflected their own inability to build a stronger bailout fund for containing the turmoil. Some euro-zone officials also believe the IMF, with its international credibility and outsider status, could be more effective than the Europeans themselves at crafting a bailout plan and executing its terms.

But the IMF would need far more money—many times the $390 billion in its current available resources—to have a realistic prospect of taking a leading financial role in a rescue of a major economy such as Italy. Italy's bond yields have surged in recent months as investors doubt its budget path. If Italy were to pursue IMF loans, that might drive away even more private-sector investors and force the Italian government to rely on bailouts. The country will need to borrow at least €300 billion next year to finance its government.

U.S. officials maintain that the responsibility for saving the euro zone can't fall to the IMF. The U.S. is the largest single power at the fund, controlling 17% of its voting rights and on the hook for that share of any potential losses.

Even though the Obama administration hasn't suggested putting up any new money for the IMF, it is being forced to fight Republicans in Congress on the issue. GOP lawmakers want to rescind a $108 billion U.S. credit line to the IMF approved almost three years ago, and block any U.S. money from being deployed for European bailouts.

White House spokesman Jay Carney on Friday said the IMF "has substantial resources" and "American taxpayers are not going to have to make any more commitments to the IMF."

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